Dr. Steven Van Garsse PPP Unit Flemish Department for the General Government Policy

- Head of the central PPP unit ( PPP Knowledge centre of the Flemish government administration, Flanders Region, Belgium) since Involved in several road PPP’s & concession projectteams in the Flanders region. - Adjunct professor of law (Phd “Concessions and PPP” Law) at the University of Antwerp & Antwerp Management School (transport-, public procurement-, administrative law)

 Instruments for road financing  Belgian concession legislation, evolution & experience  Cases  Some conclusions & lessons

 Very different instruments for road financing ◦ Annual budget ◦ (Road) fund/government lending ◦ Private (pre)finance  Demand risk type contracts (including tolling)  Availability based schemes  Mixed contracts

Private (pre)finance: Demand risk based contracts ( classical concessions cfr European law): user payments or shadowtoll  Availability based contracts: availability risk (DBFM): availiability payments !! Note: from an international perspective both types are sometimes called “concessions” and/or “PPP”. In some countries like France only the second form is considered a PPP For the sake of clarity in this presentation: “DBF(M)O/concession”: demand risk based (tolling) “DBFM”: availability based contracts

DBFM: Contrary to traditional contracts, the DBFM-contractor is responsible for the design, construction, maintenance, operation and financing of a project. Because of the fact that the contractor is responsible for design, construction, operation and maintenance, the contractor has to take full responsibility for e.g. lifecycle costs. The financing, which should initially be obtained by the contractor, generally includes the development costs, the total contract price and the costs of maintenance during term. The contractor has to earn back these investments by exploiting (making the project available and receiving availiblity fees) a project over a relatively long period of time. The term of a DBFM Contract would generally be in a time-frame of 30 years

 A DBFM model for capital projects provides, if welstructured, extended lifecycle benefits compared to projects that are delivered using conventional methods which include: -Transfer of upfront financing costs and spreading of financial charges over a period of time makes it possible to attenuate the constraints of annual programming -Overall project cost certainty -Transfer of risk to the private sector and -Transfer of maintenance costs for the term of the contract; - The contracting authority only pays for the project (i.e. the service) if and to the extent that the project actually works.. ) BUT: a DBFM system does not solve the funding problem, as the authority must pay a remuneration to the DBFM company in due course. A DBFM contract does not therefore generate new funding sources + By comparison with budgetary funding, this method also highlights an apparent increase in financial expenses (due principally to the return on invested capital required + transparant (private) risk pricing).

 DBF(M)O/concession: a contract, under the terms of which a public authority charges a company with making the investments required to create the service at its cost, and to operate the service at its own risk, the company being remunerated in the form of a price paid by the users of the service and/or the public authority BOT (Build, Operate and Transfer): a company funds, constructs, owns and operates an infrastructure for a limited period (approximately 30 years), at the end of which the infrastructure is transferred at no charge to the concession authority. BTO (Build, Transfer and Operate): a company funds and constructs an infrastructure, but in this case transfers ownership to the concession authority immediately after completion of the construction phase. It then loans the infrastructure from the State, which it operates for a limited period at the end of which all rights are restored to the concession authority. BOO (Build, Own and Operate): a company funds and constructs an infrastructure, which it owns and operates for an unlimited period. A variant of this is the BOOT (Build, Own, Operate and Transfer) contract.

 Benefits DBF(M)O/concession : similar to DBFM but ◦ Demand risk driven, so very different payment mechanism:  Via toll (direct user payments, = replacing tax-payer money by user money) = application of the user-payer principle.  Shadowtoll (government payments instead of user, the State remunerates the concession company, principally on the basis of the traffic observed on the motorway ). But see remark DBFM as to the funding.

Type of InstrumentsAdvantagesDisavantages CONCESSIONS DBFO concessions Financing of road network construction, maintenance and operation Technical innovation made easier Cost certainty Transfer of some risks from State to SPC. Private sector operation can reduce political considerations that prevent the toll road from operating efficiently. Greater efficiency in project execution Greater flexibility in project management User pays principle (classical concessions) Earmarking resources (only for classicas concessions) Resources may be inadequate for needs Part of income tied up for toll collection Necessity for a real partnership between public an private sectors (so as not to leave too many risks for the private sector). Need for government support Private sector financing costs more/ risks are priced Traffic- related uncertainty: classical concession system alienates a number of users Payment by shadow toll /availability fee over 30 years Takes a long time to set up & high transaction cost Shadow tolls /DBFM ROAD FUND Autonomy in road sector management +loans Possibility of planning road expenditure Greater possibility of financing politically unattractive expenditure (maintenance) Necessity for an efficient road organisation to manage road fund income (if any) Debts are consolidated Lack of private sector know how & efficiency BUDGET Democratic process of allocating budget & classical techniques (construction contracts) Budget fluctuations, debts are consolidated Resources to allocate between the various sectors of the economy Public management related constraints Planning Difficulties Compartementalisation

 Legal regime  DBF(M)O concessions: first regulated in Belgian by innovative law of 1832 & 1862 ◦ A lot of infrastructure (roads, railways, canals) privately financed  Nowadays: no specific law: ◦ DBF(M)O concessions are partially regulated under public procurement law (cfr European procurement directives)

 Directive 93/37/EEC distinguishes a works concession from a public works contract by the fact that the concessionaire is granted the right to exploit a construction as a consideration for having erected it. The existence of an exploitation risk related to the investment made is the determining factor. This right of exploitation may also be accompanied by payment.  The right of exploitation implies the transfer of the responsibilities of operation from the grantor to the concessionaire. These responsibilities cover the technical, financial and managerial aspects of the construction. For example, the concessionaire is responsible for making the investments required so that the construction is available to users under good conditions. He is responsible for paying off the construction and bears the risks inherent in the construction, management and use of the facilities.  The right of exploitation allows the concessionaire to demand payment, over a certain period of time, from those who use the structure erected and/or other forms of remuneration from exploitation, such as tolls, fees or “shadow tolls”. The fact that the right of exploitation may be accompanied by payment does not change if the sum paid covers only a part of the cost of the construction. It can happen that a State bears part of the costs of operating the concession in order to keep prices down for users. This partial remuneration can take the form of a flat rate amount or a sum paid on the basis of the number of users. This partial remuneration should not, however, have the effect of eliminating the risk inherent in exploitation that is borne by the concessionaire – otherwise it will be reclassified as a public works contract.